Dr.Monzer Kahf, a prominent economist and counselor states: Buying units in mutual funds amounts to becoming a partner in the fund and authorizing the management to buy stocks and other securities. Hence, the same rules that apply to buying a single stock apply to mutual funds’ units.

Accordingly, let us take two extremes as examples: 1) units of a mutual fund that specializes in stock of Islamic banks and Islamic insurance companies: this is of course permissible and you can take the profit of this fund all Halal InShaAllah; and 2) a mutual fund that specializes in interest-based bonds that is like investing in interest not permissible in Shari’ah.

Of course, the majority of funds available in the US and Canada are between these two extremes! Here one has to choose funds that have the least of Haram, in terms of both interest and activities of companies that the fund invest in and once you choose a fund you have to make your own research as to the percentage of non-permissibility out of the profits and dividends of these companies and give that percentage away to Muslim charities in order to keep your own money (asset and gains) pure. One has to do one’s own homework before taking action on any investment!”